DEFA to scale up ASEAN economies’ tech companies beyond borders

How robust are Southeast Asian tech ecosystems?

The rise of the Southeast Asian tech ecosystems has generalizable patterns. Typically, the ecosystem is started by a few large players with the first payments or e-commerce solutions. Then comes a phase of consolidation, giving rise to larger multi-faceted businesses and storied decacorns, such as superapps, with US$10 billion and higher valuations. These businesses are tech ecosystems in and of themselves. Grab, originally founded in Malaysia and now headquartered in Singapore, has become Southeast Asia’s leading superapp. In Indonesia, the Gojek and Tokopedia merger into the GoTo Group has birthed a regional tech powerhouse. Vietnam’s MoMo brings together more than 10,000 partners across various industries, including consumer finance, insurance, e-commerce, travel, and on-demand services.

The success of ASEAN’s tech ecosystem tracks the growth of tech ecosystems globally and owes to a number of factors, such as internet connectivity, growth of the middle class, increasing acceptance and use of social commerce, e-commerce, and ride-hailing. Policies such as fintech regulatory sandboxes and tax incentives for tech companies have also helped. In particular, the Philippines, Malaysia, and Thailand have been following in the footsteps of global benchmark Singapore to adopt policies conducive to digital ecosystems and trade.

However, the size of the Southeast Asian tech ecosystem and the scale of firms in it are still quite small, about a quarter of firms born in the United Kingdom during 2006-25. Of the 17,919 startups, 2,629 reported funding rounds, and of those, about 2% had received more than US$100 million, and 14% had reached more than US$10 million. These are not unusual numbers globally speaking – the UK’s startup funding has a similar long, flat tail – but they do indicate that most firms fail to scale. To accelerate regional tech ecosystems’ growth, then, Southeast Asian policymakers need to promote regional integration that enables local startups to gain greater scale and create new jobs, and that incentivizes investors to invest in local startups. Thus, there is a need for a digital trade deal like DEFA.

Why DEFA matters to local tech ecosystems

There are at least four major reasons why DEFA is seen as a means to gain scale, and how it can promote local tech ecosystems.

First, DEFA could help the growth of local tech ecosystems by reducing the region’s regulatory fragmentation, such as differences in data privacy, data transfer, consumer protection, online liability, and cybersecurity. The regulatory fragmentation is particularly vexing for fintechs that face diverse national rules in such areas as payment licensing and anti-money laundering and combating the financing of terrorism (AML/CFT) regulations. As a result, fintechs in the region rarely truly regionalize – and this, in turn, creates inefficiencies and delays in regional cross-border e-commerce payments. Nextrade Group’s research shows that while payments interoperability has improved, it still costs up to US$19 billion in missing trade, or 1.8 million small business jobs.

Second, locking in DEFA rules for firms to access and move data from their foreign customers, markets, and operations is a direct investment into local tech ecosystems. Local service providers that are present in many markets devour data as a means to create new value and new revenue. In a Nextrade Group survey, 81% of ASEAN firms said they use data to improve products and services, and 77% of digital service providers stated that data from domestic and foreign markets is worth at least 20% of their revenue annually. This is in line with some other analyses, like the Center for Business and Economics Research (CEBR) and KX’s analysis, where finance and insurance would boost their revenues by 22% and telecommunications companies by 37%, if accessing real-time data.

Third, DEFA could promote local tech ecosystems by enhancing access to other markets’ tech offerings. Gojek, for example, uses Google Cloud to reduce the latency of data needed to match demand with supply and to build machine learning models to predict where surges of traffic will surge. US cloud service providers, software, and AI capabilities enable ASEAN tech companies to build their tech stacks as well as streamline workflows, enhance collaboration, and manage human resources. DEFA could lock in reciprocal market access and non-discrimination against regional and global tech companies, allowing local tech companies to leverage the most suitable digital services from around the world and create new value.

Fourth, digital openness that comes as a direct product DEFA would play a vital role in helping ASEAN attract foreign direct investment (FDI) and startup capital that promotes local tech ecosystems. Many Southeast Asian economies have been magnets for global technology companies, with enormous potential for further investment: of the 3,126 office locations of the top 30 global technology companies around the world, ASEAN is home to 107 offices, or 5% of the global total. ASEAN attracted US$35 billion in FDI inflows in the IT industry in 2014-23, or 2% of all FDI and less than a tenth of manufacturing FDI. Academic research has found that a 10% increase in a country’s digital trade openness could lead to a 2-4% impact on FDI inflows.

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